Wednesday, January 22, 2014

The New Year has
just begun, and the FCC, like the rest of us, could stand to make some New Year’s
resolutions. A key one could be reforming its transaction review process.

Already, there
are a few potential mergers and acquisitions that may require Commission review
in the coming months. Frontier Communications announced in December that it seeks to acquire
AT&T’s wireline business and statewide fiber network assets in Connecticut,
and Sprint is reportedly seeking to acquire T-Mobile, according to the Wall
Street Journal. In
perhaps a leap of anticipation, the American Antitrust Institute (AAI) has
already urged the FCC and the Department of Justice to block any merger
of Sprint and T-Mobile, arguing that it would stifle competition and harm
consumers. And it is at least conceivable we could see a transaction involving
Time Warner Cable and other parties.

The FCC’s transaction
review process has drawn much attention and discussion over the last few years.
In 2011, the House Subcommittee on Communications and Technology held several
hearings on FCC process reform. On May 13, 2011, the Subcommittee heard testimony from Chairman Julius Genachowski,
Commissioner Michael Copps, Commissioner Robert McDowell and Commissioner
Mignon Clyburn on what was working at the FCC, recent improvements to the FCC’s
processes, and what still needed attention.

Chairman Walden
opened the hearing by proposing several reforms to FCC processes. Regarding the
FCC’s transaction review process, Congressman Walden stated, “the FCC’s transaction review standards are vague and susceptible
to abuse.” The Congressman also highlighted an observation by Chairman Emeritus
Dingell, who stated in a hearing back in March 2000 that there is “great need
to address and to reform the way the FCC handles its merger reviews. These are
a remarkable exercise in arrogance, and the behavior of the Commission,
oft-times by reason of delay and other matters, approaches what might well be
defined as not just arrogance, but extortion.” Congressman Stearns, Congressman
Christensen, and Commissioner McDowell particularly focused on the need for
reform of the FCC’s transaction review process throughout the May 2011 hearing.

In July 2011, Congressman
Walden circulated a Discussion Draft of the FCC Process Reform Act of 2011. Later that month, the Subcommittee held
another hearing on “Reforming FCC Process,” and heard testimony from industry
representatives, think tanks, consumer groups, academia, and the States. FSF
President Randolph May testified and supported many of the proposed reforms in
the Discussion Draft, particularly reform of the Commission’s transaction
review process:

In my view, the provision reforming the
Commission's transaction review process is as important as any other in the
bill in light of the abuse of the process for many years now. The agency often
imposes extraneous conditions -- that is, conditions not related to any alleged
harms caused by the proposed transaction after they are "volunteered"
at the last-minute by transaction applicants anxious to get their deal done.
The bill's requirement that any condition imposed be narrowly tailored to
remedy a transaction-specific harm, coupled with the provision that the
Commission may not consider a voluntary commitment offered by a transaction
applicant unless the agency could adopt a rule to the same effect, would go a
long way to reforming the review process.

In November
2011, Congressman Walden introduced H.R. 3309, the FCC Process Reform Act of 2012. Among many reforms, the bill proposed
changes to the Commission’s transaction review standards. That bill passed the
House in March 2012, but died in the Senate.

Another Discussion Draft was circulated during the summer of 2013. Now entitled the "FCC
Process Reform Act of 2013," it retained two substantial reforms proposed
for the Commission’s transaction review standards from the original 2012 bill: that the Commission could only
condition its approval of a transfer of lines, licenses or other transaction
if:

“(A)
the imposed condition is narrowly tailored to remedy a harm that would likely
arise as a direct result of the specific transfer or specific transaction,”
and;

“(B)
the Commission could impose a similar requirement under the authority of a
specific provision of law other than a provision empowering the Commission to
review a transfer of lines, a transfer of licenses, or other transaction.”

In addition, the
2013 Discussion Draft added a provision, which would require that the
Commission could not impose conditions on approval of transactions unless “(C)
the likely harm described in (A) is uniquely presented by the specific transfer
of lines, transfer of licenses, or other transaction, such that the harm is not
presented by persons not involved in the transfer or other transaction.” By
adding this provision, the Discussion Draft proposed to further strengthen the
transaction review standards contained in the original 2011 draft of the FCC Process Reform Act of 2012.

In his July 2013
testimony on the Discussion Draft before the House
Subcommittee on Communications and Technology hearing, “Improving FCC Process,” FSF President Randolph May specifically
praised the proposed transaction review process reforms included in the most
recent draft of the bill:

The provisions [proposed],
especially the addition that would allow the Commission to condition approval
of a proposed transaction only if the condition addresses a likely harm
uniquely presented by the specific transaction, would go a long way toward combating
abuse of the transaction review process.

A few months
after the Discussion Draft was circulated, a compromise version of the bill was
reintroduced in December 2013 as H.R. 3675, the FCC Process Reform Act of 2013. The compromise version of the bill removes
the provision in the FCC Process Reform Act of 2012 that would have required conditions to
be “narrowly tailored” and that would have more narrowly defined the “harm” resulting
from the transaction. Although it would have been preferable for these
provisions to remain, the FCC Process Reform Act of 2013 nonetheless retains important
improvements for the Commission’s transaction review process.

The current bill
still provides that the Commission may only condition its approval of
transactions if the condition remedies a harm likely to result from the
specific transfer or transaction pending, the harm is unique to that
transaction, and the imposition of the condition is within the Commission’s
authority other than that granted by sections 214, 309, or 310. These
provisions would make it more difficult for the Commission to impose conditions
on transactions under review unless they are necessary and appropriate.

Even absent
congressional action, the FCC itself could institutionally reform its
transaction review process to reflect the changes proposed in the FCC Process Reform Act of 2013. The Commission could do so by
approaching pending mergers and acquisitions with regulatory restraint.

The FCC
currently reviews transactions under the broad public interest standard. As
such, the Commission could undertake reforms absent passage of the FCC Process Reform Act of 2013 by issuing a formal policy statement expressing
its intent to abide by the proposals included in the Act. Or, the Commission
could simply act in accordance with the transaction review standards proposed
in the Act when approaching pending transactions. Modifying its transaction
review process by issuing a policy statement or by acting consistently with the
reforms proposed in the FCC Process Reform Act is within the FCC’s discretion. Further,
these institutional changes by the agency would remove unnecessary burdens,
promote efficient marketplace transactions, and in turn, benefit consumers.

For a long time,
FSF scholars have focused on the need to limit the Commission’s ability to manipulate
the transaction review process. As far back as 2000, in Any
Volunteers?, FSF
President Randolph May discussed how the Commission regulates, in effect, by imposing
“voluntary” conditions on transaction approvals rather than engaging in general
rulemaking proceedings that would be applicable to all similarly situated
parties. Mr. May stated, “Indeed,
even when the ‘volunteered’ conditions relate more closely to the Commission's
articulated competitive concerns … regulation by condition is unsound, because
it imposes new burdens only on the merging parties.”

There are many
other pieces on the FCC’s transaction review process on FSF’s blog. The point is, the FCC has imposed unnecessarily
burdensome, “voluntary” conditions on many major transactions in the past, even
when those conditions were not related to the unique issues or harms presented
by the pending transaction.

The FCC Process Reform Act of 2013 would substantially improve the
transaction review process. However, without awaiting the passage of new
legislation, the Commission should begin the New Year by committing
to take a new approach to this process by acting with regulatory restraint, and
reviewing proposed transfers and transactions in conformity with the review
standards proposed in the Act.

Perhaps under
Chairman Wheeler, reform of the transaction review process could be a New
Year’s resolution the Commission can keep.